TeamLease Services' Q2FY20 results (Outperformer) - Margin reset; volume growth trajectory intact!

Q2FY20 result highlights

• Cons. rev. grew 1% qoq/16% yoy (5% miss) led by 17% yoy growth in General Staffing and eCentric consolidation in Specialized Staffing. However, there was a margin miss across both General staffing and HR Services segments which led to EBITDA posting a growth of just 2% yoy to Rs245m (24% miss). Margin fell by 27bps yoy to 1.93% (est.: 2.42%). PAT fell 19% yoy to ~Rs202m (28% miss).
• General Staffing: Associate base grew +4.4k qoq (IDFCe: 5k) to ~165k (+14% yoy). Revenue grew by 1% qoq/17% yoy to ~Rs11.4bn (5% miss), while EBITDA margin came in at 1.83% (-24bps qoq; -7bps yoy). Margins declined due to 5% qoq increase in core employee strength, 6K net churn in NETAP associates (rev is booked net of expenses and is thus an EBITDA impact) and ESOP hit of Rs10m. Productivity fell to 261 from 277 qoq while mark-up was up to Rs739 from Rs730 qoq.
• Specialized Staffing: Rev. grew 2.3% qoq to ~Rs1bn (in line) with EBITDA margins coming in at 6.3% (-10bps qoq; IDFCe: 6.7%). Evolve (telecom) margins were around 3% while IT margin was 9%.
• HR Services: Rev. grew by 26% qoq (in line) after the sharp fall in Q1 but was still down 25% yoy as TEAM decided not to take any new Govt. mandates due to constant collections issues. Out of the Rs60m provision booked in Q1 (towards Govt.) only Rs15m was recovered in this qtr and despite that the division reported a EBITDA loss margin of 0.7% (est: +4%) due to delays in collection and as its decision to not take any new Govt. mandates hurt rev.
• TEAM’s PF trust has investment of Rs1.7bn in IL&FS and DHFL.

Key positives: General staffing volume growth.

Key negatives: Sharp margin miss across segments.

Impact on financials: Reduce FY20E/21E EPS by 22%/16%.

Valuations & view

TEAM remains confident of growing its general staffing business at 18-20% revenue CAGR (led by a ~15% volume growth) over the medium-term. However, margin has been reset lower in this quarter, with business model changes (decision to exit from Govt. mandates in HR Services, higher core employees to build bench strength) which drives sharp cut in our earnings estimates. However, given the macro-economic sweet spot of the flexible staffing industry and TEAM’s leadership position in the same, we remain confident that the company can deliver industry leading growth. Margin performance (across segments) and turnaround in HR services is a key monitorable. Maintain OP rating with a DCF-based revised TP of Rs2,857. Key risk is severe economic slowdown.